Will the services sector be India?s engine of growth propelling its transition to modernity? In sharp contrast to China, much of India?s ?industrialisation? is services-led. This boom is driven by the creation of associated productive assets such as buildings, telecom, multiplexes, consumer durables and so on through forward and backward linkages with the services sector. It is pertinent that India?s telecom sector took off after IT offshoring. Telephony and Internet growth has matched that in China. The teledensity gap has no doubt widened from three to five times over the last 10 years, but India?s mobile telephony market is nevertheless growing faster. China had 4.5 times the number of Internet users in 2006 than did India, down from six times in 1999. India?s impressive ?virtual infrastructure? growth relative to China possibly explains why the GDP growth gap between China and India has been narrowing, even as the overall infrastructure gap continues to widen. The services sector, which relies more on virtual than real infrastructure, has accounted for over 70% of India?s GDP growth over the last decade.
Despite apparent differences, the biggest long-term developmental challenge faced by both China and India is fundamentally similar: median incomes continue to languish despite rapid economic growth, as the vast majority of their populations are stuck in low-productivity jobs dependent on agriculture. Just under 60% of India?s billion plus population continues to be dependent on the agricultural sector whose share in national income is shrinking fast and stands at less than 20% now, down from almost a third in the early 1990s.
In an influential work published several years ago, Barrington Moore Jr showed how much the genesis of the modern world, including the origins of dictatorships and democracies, was shaped by the resolution of this basic agrarian question. The roots of China?s communist revolution lay in the inability to integrate the peasantry through processes of capitalism from either above or below. This integration now appears to be happening from below in both China and India.
While it is frequently argued that China?s competitive advantage lies in manufacturing, and India?s lies in services, the sustainability of ?services led modernization? is often called into question by economists and economic historians alike who draw attention to conventional wisdom?such as the Petty-Clark Law and Kuznet?s stages of growth?on the expected transition from primary to secondary to tertiary sectors. Traditionally, it was labour intensive manufacturing that facilitated the structural shift in employment out of low-productivity agriculture, and this does indeed appear to be happening in China. India?s manufacturing, on the other hand, is much more capital intensive. While this can in part be attributed to employment protection legislation, another possible explanation is that over the last few decades, technological change has turned manufacturing increasingly into a labour saving activity. Services, especially knowledge-based, on the other hand, are now more labour intensive. The sustainability of services-led growth in India is currently threatened not so much by low labour intensity as the short supply of skilled minds.
Following and developing upon the arguments advanced several decades ago by the economic historian Alexander Gerschenkron, it is entirely conceivable that the Indian model could be another variant of the path to modernity. The German and French model of industrialisation was different from Britain?s, and Russia?s from both. Banking capital played a much greater role in German and French industrialisation than in Britain. The State, which played such a seminal role in the industrialisation of Russia, failed to play a similar role in China and India in that private entrepreneurship is critical, with the State basically limited to providing infrastructure, both physical and social, and regulation. While Chinese development is much more State directed, the more fundamental difference between the Chinese and Indian paths to modernity may well lie in their sectoral engines of growth.
The writer is a civil servant. These are his personal views